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Investors are seeking beneficiaries of a proposed bill that would limit American businesses’ dealings with some Chinese biotechnology firms.
The Biosecure Act would restrict federally funded medical providers from contracting with a select group of Chinese biotech companies or using their equipment or services. WuXi AppTec Co. — which would be affected and derives about 65% of its annual revenue from the US — fell 10.4% in Hong Kong on Tuesday.
If the Act is enacted — before the House passed it on Monday, Bloomberg Intelligence gave it a 70% chance by year-end — some pharmaceutical companies will have to seek out new partners that can fill the gap. Shares have surged for businesses in India, South Korea and Japan that are seen as positioned to seize the opportunity left by those Chinese companies, which generate billions of dollars in revenue each year from American clients.
“India has all the ingredients to capture a good share of this growth,” said Nimesh Chandan, chief investment officer of Bajaj Finserv Asset Management. “A lot of the Indian companies have good relationships with life science and pharma companies globally, and have now built up capabilities across the value chain.”
Chandan as of July 31 held Indian contract development and manufacturing organization stocks like Divi’s Laboratories Ltd., Piramal Pharma Ltd., Syngene International Ltd. and Neuland Laboratories Ltd. They’ve already gained between 34% and 105% since Jan. 25, when the US House introduced the Biosecure Act. India’s BSE Sensex index has risen 15% over the same period.
South Korea’s Samsung Biologics, cited as a potential beneficiary of the Act by KB Securities Co. analyst Hye Min Kim, has seen inquiries of related contract development orders double since the amendment was introduced.
Samsung Biologics shares jumped 3.2%, while Divi’s Laboratories and Piramal Pharma climbed over 4% each on Tuesday.
Investors may still want to exercise caution. For one thing, the bill hasn’t become law just yet. The larger-than-expected block of “nays” in the House vote indicated the bill is not without its detractors, which may suggest further tightening on China contract development and manufacturing organization vendors may not be as straightforward as anticipated, Morgan Stanley analysts led by Sean Wu wrote in a note.
In the next eight years, “Chinese companies will continue to be very strong players” given the sector has very high barrier to entry, said Victoria Mio, head of Greater China equities and portfolio manager in Asia ex-Japan equity team at Janus Henderson. It will take a long time for competitors to build their capability as well as facilities, she said.
Still, analysts and investors are watching carefully for potential winners outside of China.
Bruce Liu, a senior partner at Simon-Kucher in Shanghai, sees a CDMO alliance with Korea, Japan, India and Taiwan — along with Switzerland-based Lonza Group AG and Thermo Fisher Scientific Inc. — as a potential beneficiary.
And shares of Japan’s Fujifilm, another company possibly positioned to move into the space left by the Chinese firms, according to KB’s Kim, are already up 35% this year.
(Updates with Tuesday’s share moves in 7th paragraph)
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